Bets mount on second RBA cash rate cut in two months

Mark Mulligan

The sluggish pace of Australia's economic rebalancing that has been confirmed in recent data could bring on a second cut in the cash rate in as many months when the Reserve Bank of Australia meets on Tuesday to decide its next policy move.

Bets have been mounting since last week's subdued wage inflation report and weaker-than-expected capital expenditure surveys that the RBA would wait no longer to consolidate February's 25-basis-point cut, the first in 18 months, with a second reduction of the same size.

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Economists tip fourth-quarter GDP growth, released on Wednesday, between 0.5 and 0.8 per cent. Photo: Reuters

However, many economists have been careful to hedge their bets, caught between the compelling case that Australia's transition away from resources-related investment has been slow to gain traction and uncertainty about the RBA's forward guidance policy.

"We expect that the RBA will cut again at its March meeting next week," Bank of America Merrill Lynch Australian economist Saul Eslake said in a note.

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"However, we do not have a high degree of conviction around this call.

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"This is because although we accept that the short-term economic outlook warrants further easing, the RBA has provided no communicated forward guidance."

National Australia Bank senior economist Spiros Papadopoulos typifies those pundits who say the central bank sees no urgency in following up its February cut to 2.25 per cent.

"NAB's view is that the RBA will sit and wait to review incoming information before cutting again in May," he said.

"Forward guidance in Tuesday's media release will be particularly important."

Nor could external factors be ignored in the RBA's final deliberations, UBS economist Scott Haslem said. He argues that the recent flurry of monetary easing worldwide had worked against the RBA's attempts to get the Aussie to more closely reflect the country's deteriorating terms of trade.

"We'd suggest the initial arguments favouring the need to lower the cash rate from its prior long-held 2.5 per cent to 2 per cent have been strengthened since the February rate cut," he said.

"In particular, we'd argue the offshore factors – a weaker terms of trade and risks of an elevated Australian dollar – are little changed as key commodity prices have continued to fall across January and February, while 19 central banks have eased policy, putting upward pressure on the Australian dollar."

The latest central bank to ease was the People's Bank of China, which on Saturday cut its benchmark deposit and lending rates for the second time in three months.

The move reflects deepening concern over an economy squeezed by a property slump, tighter controls over local government debt and rising capital outflows.

Markets will be keenly watching this week for further signs of slowdown in the world's second-biggest economy, with the final manufacturing purchasing managers' index likely to confirm the weekend's flash data showing a slight, 0.1-point improvement on January's 49.8, where anything below the 50 benchmark is a negative read.

Much of the domestic data due out this week is backward looking, providing the final elements of Australia's national accounts for the fourth quarter of last year, and so the annual rate of growth.

These include company profits – adjusted for inventories – net exports' contribution to gross domestic product, and fourth-quarter public-sector demand, another important element of the national accounts.

Economists see fourth-quarter gross domestic product growth, released on Wednesday, between 0.5 and 0.8 per cent, with markets coming in about 0.7 per cent. This compares with the parlous 0.3 per cent growth in the September quarter.

These estimates would leave the annual rate between 2.5 and 2.7 per cent, in line with official forecasts for most of last year, after a deceptively strong first quarter.

"A rise of 0.7 per cent would be a reasonable result," Australia and New Zealand Banking group economist Felicity Emmett said .

"[However], when taken together with the 0.3 per cent gain in the third quarter it suggests that growth remains tepid," she said.

Any disappointment with this data, particularly the day after another interest rate cut by the RBA, would trigger heavy selling of the Australian dollar, which has recently held steady near US78¢.

It could also offset the positive impact of monetary easing – if that eventuates – on the local share market, whose benchmark S&P/ASX 200 index has been flirting with the psychologically important 6000 mark for more than week.

After edging ahead last week as the February reporting season wrapped up, the market took a last-minute blow from a bleak earnings outlook from retailer Woolworths on Friday.

The company's shares plunged 9 per cent on Friday, dragging down the consumer staples index against the broader market trend.

According to the SPI futures contract, the stock market is set to open 0.07 per cent lower on Monday morning, after a fourth-quarter growth downgrade in the United States pushed US stocks lower in New York trade on Friday.

Key data this week from the US includes the latest purchasing managers' index, which will provide insights to the sustainability of the country's recovery, and so the chances of an imminent interest rate hike by the Federal Reserve.

Fed chairwoman Janet Yellen is due to speak at a dinner in New York where market watchers will be looking for a more hawkish tone on the economy and monetary policy.

Unemployment and trade figures later in the week will also help flesh out the recovery picture, with any downside surprises likely to drive a greenback selloff against the Australian dollar and other currencies.